Tata Sons gain is TCS‘ loss is the common theme among analysts after N Chandrasekaran was named Chairman of the Tata Group holding company.
What is TCS' loss is Tata Sons' gain is the common theme among analysts after N Chandrasekaran was named Chairman of the Tata Group holding company yesterday. TCS’ third quarter numbers did not drastically beat analyst expectations but Chandra’s designation-change has prompted them to reduce their price target.
Motilal Oswal in its report said that top-level changes in the last couple of years have understandably been accompanied by a round of changes (as in Infosys, Wipro and Mindtree), and one will have to be watchful of a potentially similar shuffle at TCS.
Information Technology (IT) being a manpower intensive business is sensitive to changes at middle and senior levels. The reason these changes have a higher impact is because the person heading a company is generally seen as its face by the client. A client develops a relationship with the person rather than the company.
Thus, we see a number of onsite employees quitting their jobs and taking up the more remunerative consulting assignments where they represent their erstwhile clients and outsource work from service providers. Indian companies have tapped these erstwhile employees who are now consultants to source work from companies abroad.
In the case of Chandrasekaran and TCS the impact is more pronounced because he was a hands-on leader. It is reported that Chandrasekaran was spending three-fourths of his time meeting clients. An industry peer described him as a CEO who collects miles.
Chandrasekaran’s efforts were visible in TCS’ revenue growth which jumped over three-fold to Rs 1,08,646.21 crore in FY16 from Rs 30,028.92 crore in FY10. Broking firm Jefferies in a report said: “The strong credentials of the outgoing CEO – long history of industry leading performance, client connect and intense deal focus could increase investor nervousness especially given the structural changes in the industry and immigration noise.”
TCS can face tougher challenges ahead as Chandrasekaran is being replaced by the CFO of the company. Being a technology-based industry, replacing an operations person with one from a finance function can backfire, especially since the finance personnel are considered to be backroom boys.
Jefferies adds that the management changes have overshadowed the company’s results and could keep the stock under pressure until growth and margins improve.
Furthermore, the new CEO will have to deal with visa issues arising out of the political changes in US. TCS, however, has been proactive by recalibrating its business model towards lower visas by applying for 4,000 visas in the current year against 14,000 in the previous year. This has been done by adjusting onsite cost structures between sub-contractors, visa holders and US locals. Nonetheless, developments in the US would need proactive monitoring.
TCS has been impacted by the general slowdown in the IT space. A new CEO would be under pressure from the Board and shareholders to deliver growth at a time when the industry is going through one of the toughest phases in the last decade.
A key metric that analysts will be closely tracking going forward will be the attrition rate in TCS. Stagnation and changes at the top led to record attrition in Infosys, just before Vishal Sikka became Infosys’ Chief in 2014.
TCS could weather the storm and has in fact attracted talent from Infosys, thanks to some quick thinking from Chandrasekaran. Infosys surely will be keenly watching the developments in TCS and would like to return the favour.